Short-Term Health Insurance as a COBRA Alternative - The Basics

Whether you're graduating from college, leaving home for the first time, or between jobs, a major change in your lifestyle often dictates a change in your health insurance coverage. For these circumstances, some health insurers offer short-term or temporary health plans (sometimes called "major medical" plans) to fill in the gaps between traditional policies.

With low premiums and high deductibles, short-term policies are designed to be more of a low-cost safety net in case of serious injury or illness than a comprehensive day-to-day health insurance plan. Benefits are limited and there are strict eligibility requirements to qualify. Additionally, temporary health insurance is just as the name implies, only a temporary solution. While some plans offer coverage for up to a year, most short-term policies offer between one month and six months of coverage.

Who needs short-term health insurance?

Despite its limitations, short-term health insurance serves an important function for certain groups of people:

• Recent college graduates are among some of the most likely consumers of short-term health insurance.  Many grads will look for jobs that will offer health insurance benefits, but until they find that job, short-term insurance can fill the gap. (For recent grads looking for more permanent coverage, many college alumni associations offer some sort of group health policy to their members.
• Short-term plans may also be attractive to individuals who are temporarily out of work. Many people who are laid off or are between jobs can continue coverage with their previous employer under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for up to 18 months, until a new employer's plan kicks in. However, some people may find that COBRA premiums are too high for their budget. A short-term policy with lower premiums may be the solution.  COBRA is neither a company or an insurance plan.  COBRA is an Act created to give most employees an option to keep their insurance for a limited amount of time if they become unemployed.

  If your previous employer is a small business with less than 20 employees, you may not be covered under COBRA. Also, if your previous employer goes out of business, you will not be covered by COBRA because the insurance pool to which you once belonged will be dissolved. In these instances, a short-term policy may be your best option until you can find coverage elsewhere.

• Those losing dependent status under their parents' health coverage are also likely consumers of short-term coverage. If you reach age 18 and are not enrolled as a full-time student, you will most likely be dropped from your parents' health insurance policy. In this situation, you will be eligible for COBRA, but premiums can be very high. A short-term policy can keep you insured for less until you find a job that offers health insurance, or you enroll in an individual health plan.
• Finally, you might consider a short-term plan if you are temporarily without insurance for some other reason. Maybe you are out of work on strike, recently discharged from the military, or have retired early and need coverage until you qualify for Medicare.

How does it work?

One advantage to a short-term health insurance plan is that it works like an "indemnity" plan in the sense that you have no preferred care provider (PCP) or gatekeeper, and you are not confined to an HMO network of doctors. Short-term plans give you the freedom to go to any doctor or specialist you like.

The kind of treatments covered by a short-term policy are fairly comprehensive. Surgery, hospital care, emergency services, diagnostic tests, prescription drugs, follow-up office visits, and even limited mental health care are included under short-term coverage.

There are, however, several areas where short-term coverage falls short of a traditional policy:

• Preventative care, including physical exams, immunizations, and PAP tests, as well as child-wellness care, are not covered, except where required by state law.
• Like most individual health insurance policies, short-term coverage excludes pre-existing conditions. The "look-back" period for these conditions varies by state, but the most common rule for short-term policies is that providers may exclude coverage for conditions diagnosed or treated within the last five years. Because temporary policies are so short, the exclusion of pre-existing conditions will last the life of the policy.
• Maternity care is almost never covered by short-term insurance. Most plans will cover complications arising from pregnancy, but routine doctors' visits are excluded.
• Most short-term policies are nonrenewable. If you decide that you want to extend your short-term policy, your provider will make you apply for a new policy.

  Most insurers will let you reapply only once, and the two policies together cannot exceed the maximum length of coverage issued by your insurer. For instance, if your insurer issues short-term policies for a maximum of six months, and your first policy was for four months, your second policy will only be good for a maximum of two months.

  Some insurers will flatly refuse to issue you a second policy if you filed any claims under your previous short-term policy. Others might offer you another policy, but they will treat any injuries or illnesses that occurred during your previous short-term policy as pre-existing conditions and thus will not cover treatment related to such conditions.

What will it cost me?

One of the major appeals of a short-term policy is its low premiums. A typical plan can cost as little as $30 a month for a single male in his early 20s, according to quotes provided by insurance carriers (premiums vary significantly according to factors such as your age and where you live).

The flip side of paying such a low premium is the high deductible that accompanies this type of policy. While traditional policies require you to make co-payments for medical care as low as $5, short-term deductibles start at $250 and range into the thousands.

Another thing to keep in mind is that with some short-term policies you must pay a deductible per injury or illness. That means that the deductible must be met each time you are treated for a new condition. With the high deductibles required by short-term providers, the money you pay out of pocket can really add up.

Many plans will also allow you to choose whether you want to pay a lump sum for a designated period of coverage or you want to pay your premiums on a monthly basis. The advantage of the monthly payment option is that it allows you to continue coverage for an unspecified number of months (but not more than a year). You will pay more for this flexibility, however.

Who's eligible?

Short-term policies with low premiums and high deductibles are designed to be a safety net and insurers don't want to provide safety-net policies with low premiums to people who are likely to need them.

Consequently, most insurers require that you are at least two weeks old and that your age will not advance past 65 during the life of the policy. If you have ever been denied health insurance before, you won't be eligible for short-term insurance, because a previous denial indicates you might have significant health problems.

In addition, you won't be eligible if: you are covered by another health insurance plan already - unless your current plan expires prior to your short term plan start date.

While no short-term health insurance provider will cover routine maternity care, some providers won't even issue a policy to a pregnant woman.

Many people may find short-term health insurance coverage appealing because of its relatively low price tag. In many cases it can be as little as 1/3 the cost of COBRA insurance.